Member Voices: The Local Option Sales Tax

Posted by: Linda Stettenbenz on February 24, 2014 at 12:24pm

The Local Option Sales Tax (LOST, or LIFT as it is now called in Louisville) bills have been filed in Frankfort, HB 399 and SB 135. If approved by the legislature in 2014, these bills would require a state constitutional amendment to allow cities in Kentucky the power to collect sales tax. If passed by state voters, cities would then put it to their voters. LOST/LIFT has been getting a lot of press in Louisville, and Gov. Beshear has indicated his willingness to support it. Louisville’s Mayor Fischer is a proponent, and is advocating for a 1% LOST/LIFT that would be for a specific amount of money for specific capital projects approved by local voters to allow “local” “democratic” control over revenue.

I’ve served on KFTC’s Economic Justice Committee for several years working for statewide tax reform to make our tax structure more fair and adequate. KFTC's position, so far, is that LOST should be viewed in the context of comprehensive reform. Further, the Jefferson County chapter has been looking at the issue of LOST/LIFT in more depth since Mayor Fischer has made it his administration’s top legislative priority. I served as a panelist at a local forum addressing the tax, and the Mayor sent someone from his office to our most recent chapter meeting to help answer questions from our members. After hearing the presentation, and having our questions answered, the Jefferson County chapter voted to oppose the Mayor's LIFT proposal. Some members said they would be willing to support it if appropriate changes were made to address our concerns. There was strong concern about LOST being regressive and about its potential to be less targeted to communities most in need of revenue. Members also expressed concerns about the practicality of the limitations placed on funding to best serve the most needed projects.

Here is my take on it: We all benefit when everyone is invested in making our communities healthier and when everyone has good opportunities to succeed, and we need revenue for that--for affordable housing, public transportation, libraries, and programs that benefit struggling people in our community like weatherizing homes for low income people. But LOST/LIFT is not a silver bullet to get that revenue, and according to Mayor Fischer’s plan it wouldn’t provide revenue for programmatic expenses of those things. We need tax reform. But we need *statewide* tax reform, and this tax must be looked at in that context. Besides that, I don’t think adding to the sales tax is a good option for reforming our tax structure. Here’s why:

The Institute for Taxation and Economic Policy analyzes state tax structures through a tax fairness lens. They've done an analysis on Kentucky's tax structure, and it's eye-opening. Look at the chart at the middle left on the 1st page, the impact of Kentucky's sales and excise taxes. The sales tax is regressive, meaning it takes a bigger bite out of the budget of low and middle income people than those with higher incomes. In Kentucky, poor people already pay 2-5 times more as a percent of income than higher income people in sales tax. Even though we exempt food and so on, it is still that regressive. Adding 1% to that would make it even more unfair. Now look at the chart to the right of that, with the impact of our income tax. You can see that Kentucky’s progressive income tax mitigates teh sales tax impacts a little. But overall—combining the effects of *all* state and local taxes—people just over the poverty line in Kentucky are still paying nearly double as a percent of income what those who are most able to afford it are contributing.

It’s part of the reason Kentucky has one of the fastest growing wealth gaps in the country; according to a recent report by KCEP, “over the last 4 decades, the poorest 20% of Kentuckians saw real household income fall nearly 12%, while the richest 20% saw incomes rise over 60%. That affects people’s ability to pay.”

It’s being called only a penny. But I know I’m not the only one who has had to decide between buying food and avoiding a late fee on a bill, when those dollars that add up on sales tax on gasoline and toiletries and so on could have made a big difference in my budget. People who have never been in this situation, or worse, may find it harder to understand how much impact small amounts of money can have on a person’s well-being. It’s not fair to continue to ask the most from those who can least afford to give.

As you can see from the above link on the last chart, Kentucky’s sales tax needs to be modernized to reflect our current service economy. Until then, sales tax revenues will continue to decrease.

Louisville’s revenue problems are not separate from the state’s. In 2010, I was one of 10s of 1000s of Kentuckians who qualified for state financial aid for college, but was denied it because the state ran out of money. Isn’t this a local problem?

Legislators will be looking at a *package* of reforms to pass. Some to provide revenue, some to provide cuts. We want to make sure that as a whole, these reforms improve fairness and adequacy for people in the state. We already know a local option sales tax would not be fair. Furthermore, the revenue it provides could vary greatly according to locality. It would provide much less revenue in areas without a lot of retail venues, while draining the resources of low and middle income people in those areas.

Though it is a linguistic nod to democracy and transparency, I don’t think it’s necessarily a positive thing that funds from Louisville’s proposed LOST/LIFT would only be for specific projects and only for a limited term to be decided by voters. The LOST/LIFT favors capital projects—like shopping centers—over programmatic ones—like GED completion programs—which means it could be more likely for outside developers than programs that benefit local people to see revenue from it. Transparency is great, but that is what budgets are for. Why do we only get to vote for a regressive tax? And in what ways will the needs of structurally disenfranchised people get addressed?

While I think it doesn’t make a lot of sense to take local taxes out of context of the state tax structure, if “local control” is really wanted, there are better ways to do that, which would be more fair and adequate. Here are three ways:

Expanding the occupational tax (local income tax). Currently cities in Kentucky are only allowed to tax wages—not rental income, and not dividends from stocks and bonds—which adds regressivity. Ohio and Indiana tax all income, not just wages. Taxing all income would make the occupational tax more fair and would increase revenue. Just like LOST/LIFT, it would require a constitutional amendment to expand local taxing power, but it’s a better solution. Mayor Fischer mentioned this as a possibility in a letter to the Blue Ribbon Tax Commission.

Expanding the property tax, while providing “circuit-breaker” credits if the tax exceeds a certain percentage of a person’s income. According to KCEP, “since 1978, Louisville’s real property tax rate has declined 35% and the county-wide rate has declined 42%. How big a decline is that? If Louisville/Jefferson County had simply maintained its real property tax rates over the years—if it had simply avoided *cutting* taxes—it would be generating in the vicinity of $60-$70 million more dollars a year for its General Fund—a good portion of what a 1 percent local option sales tax would generate.”

Better scrutiny and disclosure about “business incentives.” In the 2009 special session, the Kentucky Business Incentive Program was created that diverts 1% of occupational tax from a city to the company receiving the incentives. One of the ways this is done is through “tax increment financing” where property, occupational, and other local taxes are diverted for 20 years or so to pay back private investment in a project. Fourth Street Live is one example in Louisville. There is no way to know if or how the community gets any good from this. Who knows how much revenue we lose from these “public-private partnerships.”

In my opinion, we need to think about what we really value, and build our economy around that. We could have an economy that places a high regard on increasing corporate profits and low wage jobs. That could lead to increased sales—probably of cheap foreign-made goods, since that’s mostly what low wage people can afford—and with a local option sales tax we could get 1% of that. Then we could use that revenue for capital projects that might provide some temporary jobs and income for developers. But is that fair? Is it adequate for the Kentucky we want? The people in those low wage or temporary jobs might need help that the revenue from a local option sales tax would not provide, because it would be limited to capital projects of a specific duration. They might need help paying their utilities or weatherizing their homes to lower those bills. They might need help getting their GED or finishing a college degree. They might not be able to afford bus tickets to get to their jobs.

What if we valued the people of our communities, our neighbors? What if we said to them, your health and happiness and opportunities for a better life matter? What if we kept the focus on truly valuing our local economies? We want real opportunities for all of us to support our healthy local economies. We all benefit when kids in foster care are safe, well nourished, and educated, when we have clean air and water, and when libraries stay open. Let’s keep working together to get fair and adequate tax reform that makes the Kentucky we want possible.

KFTC has been working for 32 years for transparency, democracy, and fairness in our state tax structure. We helped move people below the poverty line off the state tax rolls, and kept a lot of bad legislation from happening that is crippling other states. But there is obviously a lot of work left to do. You can learn more about our tax work here on our campaign pages.

To learn more about the Local Option Sales Tax, check out this recent webinar that KCEP offered.